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Inland Revenue

Tax Policy

Tertiary education institutions

Issue:   Section CW 42 applies too narrowly

Clause 76



Clause 76 of the bill amends section CW 55BA to allow wholly owned subsidiaries of tertiary education institutions to be treated as exempt from income tax on their business income and incorporates certain provisions of section CW 42 in that regard.

Section CW 42 gives rise to an unintended policy outcome by excluding businesses carried on by a company for charitable purposes, and owned by a charitable trust, from the income tax exemption for charities and for community housing entities.  This unintended policy outcome was specifically addressed in clause 76 in relation to the wholly owned subsidiaries of tertiary education institutions and should be extended to the wholly owned subsidiaries of charities and community housing entities.


Under current interpretation, section CW 42 of the Income Tax Act 2007 excludes businesses carried on by a company for charitable purposes and owned by a charitable trust, from the income tax exemption for charities.  This is because the charitable trust is deemed to have control over the business and is able to direct or divert amounts from the business for its own benefit or advantage.  Practically, the application of section CW 42 as currently drafted means that a charity is not able to derive tax-exempt charitable business income in a subsidiary company (which may be desired for legal limitation of liability purposes, for example), but that same income would be tax-exempt if derived directly by the shareholder charitable trust.  This is an unintended consequence.

In defining “tertiary education subsidiary”, the proposed amendment to section CW 55BA fixes this unintended consequence for tertiary education institutions, as it allows tertiary education subsidiaries to remain tax-exempt by adding the words “other than the tertiary education institution” in the context of the control requirements.  The effect of this is that when a tertiary education institution has control over its subsidiary, the subsidiary will remain tax-exempt.

KPMG has suggested that this problem could be resolved by amending section CW 42(1)(c) of the Income Tax Act 2007 and adding the words in italics:

(c)        no person, other than a charitable entity referred to in section CW 41(1), with some control over the business is able to direct or divert, to their own benefit or advantage, an amount derived from the business.

We agree with the general tenor of KPMG’s suggested amendment in relation to wholly owned companies of charitable entities.

We also agree that a similarly worded amendment should be made to section CW 42B (the tax exemption for community housing entities) which also has control requirements similar to section CW 42.  This amendment would ensure that when a community housing entity is itself a wholly owned subsidiary of a charitable trust or another community housing entity, the wholly owned subsidiary is eligible for the community housing entity tax exemption.

EY has suggested that this matter be resolved by granting the Commissioner the discretion to approve entities for income tax exemption under sections CW 42 and CW 42B.  As mentioned earlier, we accept the need to resolve this matter but consider that it is best dealt with by clarifying the intended scope of the exemptions, rather than leaving it to the discretion of the Commissioner.


That the submissions be accepted, subject to officials’ comments.

Issue:   Support for section CW 55BA reform

Clause 76



PwC supports the intent of clause 76.


Officials welcome this support.


That the submission be noted.

Issue:   Section CW 55BA is too narrow

Clause 76


(Te Whare Wānanga o Awanuiarangi)

The proposed section should be widened to include tertiary education companies which are wholly owned by one or more tertiary education institutions.  The Wānanga sees no policy reason why the exemption should not apply if each shareholder is individually a tertiary education institution.  Furthermore, extending the exemption would assist with planning structures for jointly owned tertiary education companies in the future.


Officials agree with the submission that the exemption should apply in circumstances when a tertiary education subsidiary is wholly owned by more than one tertiary education institution.


That the submission be accepted.